Difficult retirement questions

Question 1

Surviving Spouse and child social security benefits

Answer 1

Survivor’s pension benefit under CPP and does not terminate if the recipient remarries.

The Orphan’s benefit is a benefit under the CPP and it is payable to the child of a deceased contributor until age 18, or until 25 if the child goes to full time school. The orphan’s benefit is not terminated by marriage of the child, as long as the child continues to meet the other requirements of the program.

The Survivor’s allowance is a benefit under the OAS program, and the qualifications for the Survivor’s allowance are similar to those for the allowance. The survivor’s allowance is payable until 65, when it is replaced with OAS and GIS benefits, or it can terminate before that time if the recipient dies or remarries.

The entitlement to GIS benefits is based on age and income, not on martial status. However, in the case of a couple, the GIS is reduced by $1 for every $2 of the couple’s base income.

Question 2

Marginal tax and OAS clawback rate is calculated as

Answer 2

(MTR + (OAS clawback rate x (1 - MTR)))
or
(85% x MTR) + 15%

Question 3

Effective OAS clawback rate after the reduction of your net income by 15%

Answer 3

(OAS Clawback rate 15% - (OAS clawback rate of 15% x MTR)
or
(OAS Clawback rate 15% x (1-MTR)

Question 4

Eligible designated benefit

Answer 4

Amount calculated as:
(designated benefit - unpaid balance of minimum amount)

With regards to RIF when being left to spouse or dependant child or grandchild

Minimum amount is calculated as:
-RIFs fair market value at the beginning of the year / 90 - age at the beginning of the year.

Question 5

What happens if the value of an RSP decreases or increases from time of death to when assets are actually paid out.

Answer 5

A subsequent increase in the value of the RSP investments is generally included in the income of the beneficiaries of the RSP upon distribution. Similar rules apply in the case of RIFS.

If the amount decreases, loss may be carried back and deducted against the year of death’s income inclusion.

This measure applies only when final distributions of RSP/RIF assets occur after 2008.

Question 6

Converting some or all of pension funds into cash lump sum

Answer 6

One of the following must apply:

• the benefit is extremely small, usually specified as less than $25/month or 2% of the YMPE annually
• can prove that he has a shortened life expectancy
• if any of the benefits were earned prior to the pension reform date of his jurisdiction, in which case in some provinces he could convert up to 25% of the benefits accrued prior to that date to a lump sum.

Question 7

Annuity vs lump sum

Answer 7

• If the PV of the annuity is less than the lump sum (commutation), take lump sum
• If the PV of the annuity is more than the lump sum (commutation), take annuity

Question 8

CPP Pension offset calculation

Answer 8

-((The lesser of (pensionable earning and YMPE) x offset rate) x years of service)

Question 9

Collecting pension benefits and working (PBSA - Pension Benefits standards act.)

Answer 9

The PBSA 1985 is the governing legislation for registered pension plans that are offered by employers that are federally regulated industries. The following changes have not yet been adopted by the provinces whose legislation applies to industries that are not federally regulated.

For employed pension plan members are are 71 years of age or younger at December 31, employers are now permitted to emend their registered pension plans to allow benefits to accrue and contributions to be made, subject to any adjustments for pensions being paid.

An employee can receive pension benefits from a defined benefit RPP and simultaneously accrue further benefits.

There is no requirement that the partial pension be based on a reduction in work time or that there be a corresponding reduction in salary.

An employer can offer an employee partial pension up to 60% of accrued pension benefits; while at the same time allowing the employee to accrue benefits in respect of post-pension commencement employment, regardless of whether the employee is working full time or part time.

The prohibition against the payment of bridging benefits on a stand alone basis does not apply with respect to qualifying employees.

An employer can increase the reward from full time work by offering a partial pension to those wishing to continue in employment on a full time basis.

Question 10

Employers with DPSP and RPPs

Answer 10

If an employee has only one employer during a year, the DPSP contributions by the employer for a particular beneficiary must comply with two limits:

• the beneficiary’s DPSP credits for a year cannot be more than (the lesser of ((DPSP contribution limits for the year) and (18% of the individual’s income) and;
• the beneficiary’s PA for the year for the employer cannot be more than (Money Purchase limit for the year and 18% of income).

The DPSP contribution limit is one half of the money purchase limit established for money purchase pension plans.

Employer can contribution on behalf of employee in DPSP:
-lesser of (employee’s share of profits and (Employee’s limit for DPSP - contributions to RPP)

The beneficiary’s PA is calculated as:

(A+B+C)

A=contributions made by employer to the DPSP
B= contributions made by employer and employee to a money purchase RPP
C=the PA as calculated for DB Plans if the employee of a member of a DB RPP.

Question 11

PA Formula

Answer 11

(((pensionable earnings in the previous year x benefit rate) x 9)- $600))))

Question 12

PA Reduction for connected individuals

Answer 12

Question 33/54

For connected individuals, the RSP contribution room arising in the year that the pension plan is established is reduced by:

(the lesser of ((18% x 1990 earned income) and the maximum of $11,500)

Question 13

Past service event

Answer 13

A past service event is an event that would be for service after 1989 and would be:

• a benefit upgrade provided on past service basis; or
• additional periods of pensionable service provided on a past-service basis

Past service events include upgrading the unit percentage of pension credits already earned, purchasing years of service after 1989, or transferring years of past service between pension plans that have a reciprocal agreement. Past service events give rise to past service pension adjustments.

A Past Service pension adjustment (PSPA) is an amount that measures the value of a past service event, which would be for service after 1989 and would be:

• a benefit upgrade provided on past service basis for service; or
• additional periods of pensionable service provided on past service basis.

Question 14

Non-exempt past service event

Answer 14

If you were purchasing past service for yourself, the ITA would consider it to be a non-exempt past service event. CRA certifies non-exempt past service pension adjustments on case-by-case basis.

If you had RRSP contribution room that was greater than the PSPA, CRA would certify the PSPA and permit you to purchase the additional pension credits.

CRA will usually permit the transaction as a provisional PSPA if:
-(((the non-exempt PSPA > RSP Contribution room) and (the non-exempt PSPA < (RSP Contribution room + extra amount permitted for provisional certification.)

The extra amount permitted for provisional certification is $8000.

A provisional PSPA would result in negative RSP contribution room, which you would have to carry forward to reduce your RSP contribution room in future years.

Question 15

Unlocking federally legislated funds

Answer 15

If you have attained 55 years of age and your total holdings in a federally regulated locked-in account are less than the small balances limit, you can transfer all of the funds in your locked in accounts, except for locked-in RRSP, into a non-locked RSP or RRIF of withdraw these funds in cash.

The regulations permitting this are:

• for LIF (Life income fund)
• for restricted lock in savings plan
• for RLIF (restricted LIF)

Question 16

Reverse mortgage

Answer 16

Most issuers of reverse mortgages require the owner to still have equity of 25% of the value of the home at the end of his life expectancy, meaning the reverse mortgage can consume the remaining 75%.

To determine the amount of a reverse mortgage loan, the following steps are required:

• determine the expected FMV of the house at the owner’s death based on the current value of the house, expected life, and anticipated rate of increase in his home’s value.
• determine the PV of 75% of that expected FMV based upon the appropriate discount rate.

Question 17

Tax Credit for pension income

Answer 17

The tax credit for pension income is a non-refundable credit to provide income tax relief to seniors who receive eligible pension income. The conversion rate is the lowest tax rate.

The amount of the federal pension income tax credit is calculated as:
((the lesser of (eligible pension income and the max amount for the federal pension income tax credit) x the conversion rate))

The max amount for the federal pension income tax credit is $2000.

For any taxpayer who has not yet reached 65 by the end of the year, the definition of eligible pension income is more restrictive than for after age 65.

For individuals younger than 65 years of age, eligible pension income includes:

• pension payments from a RPP received in the form of a life annuity
• annuity payments from and RSP, RIF, DPSP, and other registered pension plans as a result of the death of the taxpayer’s spouse or common-law partner, and
• the income element of an unregistered annuity payment that is the result of the death of the tax payer’s spouse

For individuals who have reached age 65, eligible pension income includes:

• annuity payments from RPP
• annuity payments from RSP or RIF
• income element of non-registered annuity
• annuity payments from DPSP

The following source of income are not eligible pension income:

• lump sum payments paid to the taxpayer when he withdraws from a pension fund, a RRSP or DPSP
• payments from CPP or QPP
• OAS, GIS or Allowance
• death benefits
• retiring allowances
• payments from an employee benefit plan or trust; and
• payments from a salary deferral arrangement or Retirement Compensation agreement (RCA)

Interest income that is eligible pension income can be reported as interest income or pension income

The capital repayment of an annuity that was purchased tax-paid capital is not taxable

If a taxpayer is receiving the interest income at least annually, she must report the interest income on the cash basis, not accrual basis.

Question 18

Deducting legal fees incurred by the taxpayer to collect or establish a right to salary or wages

Answer 18

A taxpayer can deduct amounts paid by the taxpayer in the year as, or on account of, legal expenses to collect or establish salary or wages owed to the taxpayer by his employer or former employer.

To deduct the legal fees, the taxpayer must establish that an amount was owed, whether or not it actually is collected. The legal fees are deductible in the year incurred; while any recovered income is taxable in the year it is received, even if it relates to employment in a different year.

Question 19

Disability tax credit

Answer 19

In order to qualify for the disability tax credit, the taxpayer must suffer from a condition that is so severe that it interferes with her ability to perform basic activities of daily living, and the condition must be expected to last for at least 12 months. In fact, many seniors qualify for the disability tax credit as a result of failing health, and eligibility for this credit should be considered when and individual has any degree of mental or physical impairment. However, a doctor must certify the impairment.

Question 20

Transferring credits to spouse

Answer 20

You may be able to transfer all or part of the following amounts for which your spouse qualifies:

• the age amount, if your spouse was 65 or older
• the pension income amount
• the disability amount
• tuition fees, education amounts and textbook amounts that your spouse designates

The max amount that the taxpayer’s spouse can transfer is $5000 minus the amounts that he or she uses even if there still is an unused amount

The personal credit, CPP, and EI credits are non-transferrable.

The non-transferrable credits are used to reduce the taxpayer’s federal tax. If any tax is still payable after accounting for the non-transferrable credits, the taxpayer must use the transferable tax credits to reduce his federal tax payable to zero, and only then can any remaining amount of the transferrable credits be transferred to the taxpayer’s spouse.

Question 21

Prescribed annuity

Answer 21

A prescribed annuity is an annuity that for income tax purposes the interest component is assumed to be spread evenly over the life of the annuity and that the capital portion of each payment is constant over time. The early payments from an annuity consist of more interest than the later payments. Allowing the interest to be averaged over the term of the annuity for income tax purposes provides an element of tax deferral and provides more level stream of after tax income.

Prescribed annuities are specifically exempt from the interest accrual rules. Instead, the full amount of the annuity payment is included in income in accordance (ITA 56(1)(d)) and hen the offsetting deduction is permitted (ITA 60(a)) to account for the assumed capital element of the annuity payment.

In order to qualify as a prescribed, an annuity must satisfy the following requirements of:

• the annuitant must elect prescribed treatment by notifying the policy provider in writing (in fact, most policy providers now automatically include this provision in their standard contracts.)
• the purchaser must also be the annuitant
• the purchaser/annuitant must be an individual
• payments must be level and at regular intervals (at least annually), so a prescribed annuity cannot be indexed.
• the annuity must be immediate
• the contract may be for life, with or without a guaranteed period, provided that the guaranteed period does not extend past age 90; or it may be for a fixed period, provided that the term does not exceed the annuitant’s age 90.
• The contract must be irrevocable, meaning that it can only be disposed of by death; and
• joint and last survivor annuities are only permitted if the second annuitant is the spouse, brother/sister of the primary annuitant, or a spousal trust with the annuity payable until the death of the spouse.

A prescribed annuity would be a life contract if it was a life annuity. Otherwise, a prescribed annuity would not be a life contract.